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The new consumer principle

As part of the new Consumer Duty rules, a new ‘Principle 12’ has been added to the FCA Handbook.  It states that:

“A firm must act to deliver good outcomes for retail customers”.[1]

The new Principle 12 only applies to a firm’s “retail market business”.[2]  Moreover, the standard to be applied is that which could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product or service and taking account of the needs and characteristics of retail customers.[3]

Principle 12 requires firms to:

  1. pro-actively act to deliver good outcomes for customers and put customers’ interests at the heart of their activities,
  2. focus on the outcomes customers get, and act in a way that reflects how consumers actually behave and transact in the real world, better enabling them to access and assess relevant information, and to act to pursue their financial objectives,
  3. ensure they have sufficient understanding of customer behaviour and how products and services function to be able to demonstrate that the outcomes that would reasonably be expected are being achieved by those customers,
  4. put in place processes to tackle the factors that lead to any poor outcomes that are identified, and
  5. consistently and regularly challenge themselves to ensure their actions are compatible with delivering good outcomes for customers.[4]

The new principle should prompt firms to ask themselves questions such as, “Am I treating my customers as I would expect to be treated in their circumstances?” or, “Are my customers getting the outcomes from my products and services that they would expect?”.[5]

Existing Principles 6 and 7 are disapplied where the Consumer Duty applies.[6]  However, the FCA has confirmed that it will retain existing Handbook and non‑Handbook material linked to Principles 6 and 7. This is primarily because it will continue to be applicable to firms and business activities outside the scope of the Consumer Duty. However, the FCA also considers that existing guidance may also be helpful to firms in considering their obligations where the Consumer Duty does apply.[7]

To this end, the FCA has clarified that a failure to act in accordance with existing guidance on Principles 6 and 7 which would have amounted to a breach of those Principles, is likely to breach Principle 12.[8] However, acting in accordance with Principles 6 and 7 will NOT, of itself, mean that a firm is acting in compliance with Principle 12.[9]

Either way, it is important to note that the FCA is clear that Principle 12 sets a higher and more exacting standard of conduct (with a broader application) than both:

  1. Principle 6 – which states that “A firm must pay due regard to the interests of its customers and treat them fairly”, and
  2. Principle 7 – which states that “A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading”.[10]

Next week – we’ll turn to look at the cross-cutting rules, so stay tuned!!

[1] PRIN 2.1.1R

[2] PRIN 2A.1.3G

[3] PRIN 2A.1.6G

[4] FG22/5, 4.8

[5] FG22/5, 4.4

[6] Policy Statement PS22/9, 4.15

[7] Policy Statement PS22/9, 4.15

[8] Policy Statement PS22/9, 4.15, PRIN 2A.1.17G(3)

[9] PRIN 2A.1.17G(4)

[10] FG22/5, 4.2; Policy Statement PS22/9, 4.7; PRIN 2A.1.16 and 2A.1.17G; PRIN 2A.1.17G(1)